Tension Ratchets Up in Debt Battle

President Obama looked to raise pressure on Congress to end a week-old partial government shutdown as the House and Senate headed down separate tracks to break a stalemate on government spending and the nation's borrowing limit. Photo: AP.

WASHINGTON—President Barack Obama warned Tuesday of "economic chaos" if a political stalemate causes the U.S. to no longer be able to pay its bills, and said he would accept even a short-term increase in the borrowing limit to give lawmakers time to negotiate.

Mr. Obama's comments underscored rising concern at home and abroad, including in financial markets, that the U.S. could default on its financial obligations should the standoff continue through next week. The remarks were intended to pressure Republicans to pass bills to raise the debt ceiling and to fully reopen the federal government without GOP policy demands attached.

House Speaker John Boehner (R., Ohio) quickly shot down the idea of a short-term reprieve that excludes Republican priorities, saying any increase in the nation's statutory borrowing limit must be paired with deficit-reduction measures.

"What the president said today was, if there's unconditional surrender by Republicans, he'll sit down and talk to us," Mr. Boehner said after Mr. Obama held a news conference at the White House.

"We can't raise the debt ceiling without doing something about what's driving us to borrow more money and to live beyond our means," the speaker said.

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The exchange left the stalemate no closer to resolution, with the parties dug in even on terms over which they would conduct negotiations.

Many federal agencies have been partially closed since Oct. 1, and the Treasury predicts it will run out of cash to pay its bills if the debt ceiling isn't raised this month.

The standoff prompted financial regulators to meet via phone Tuesday to discuss the government shutdown and the potential impact of a debt-limit breach, a Treasury spokesman said. The Financial Stability Oversight Council, which includes the Federal Reserve, banking and markets agencies, is monitoring effects of a possible U.S. default on short-term lending markets, including repurchase agreements and money-market mutual funds, according to a person familiar with the matter.

Financial markets are increasingly showing signs of stress. The Dow Jones Industrial Average slid 159.71 points Tuesday, or 1.1%, to 14776.53, its lowest close since Aug. 27 and its 11th drop in 14 trading sessions.

The Chicago Board Options Exchange's Volatility Index—the stock market's "fear gauge"—jumped to its highest level this year, reflecting rising demand for stock options affording protection from extreme price movements. The VIX is up 22% since the shutdown began Oct. 1.

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Jeffrey Wismer, furloughed from his job at AmeriCorps, a federal community-service program, protests the government shutdown on the Washington Mall on Tuesday.
Reuters

The rate the government pays to borrow for a month rose to its highest level in five years, following a $30 billion Treasury bill auction that was deemed "awful" by Bank of America Merrill Lynch's Priya Misra, the firm's head of U.S. rates-strategy research. The cost of hedging for a year against a possible U.S. default via credit default swaps rose as much as 10%. The price of one-year U.S. CDSs has risen tenfold since Labor Day.

Mr. Obama, who spoke by phone with Mr. Boehner earlier Tuesday, said he would negotiate on any issue Republicans want, including changes to his signature health-care law, entitlement programs and the tax code, after Congress passes legislation to reopen the government and raise the debt limit devoid of other legislative demands.

"Extend the debt ceiling. If they can't do it for a long time, do it for the period of time in which these negotiations are taking place," Mr. Obama said. "They can attach some process to that that gives them some certainty that in fact the things they're concerned about will be topics of negotiation, if my word's not good enough."

Rep. Tom Cole (R., Okla.), who is close to Mr. Boehner, said Republicans might be willing to pass a short-term debt-ceiling extension in order to start broader talks over reducing the deficit. "If the president is willing to talk, I suspect we could deal with these problems," Mr. Cole said.

Republicans showed some give Tuesday by continuing to back away from a demand that major changes in the 2010 health law be part of any deal to break the impasse. Instead, Mr. Boehner intensified his focus on demanding face-to face budget negotiations. "All we're asking for is to sit down and have a conversation," he said. "There's nothing on the table, and there's nothing off the table."

Meanwhile, the House and Senate headed down separate tracks in their attempts to resolve the stalemate. The Republican-led House late Tuesday passed a bill to create a bipartisan team of negotiators from the House and Senate to set terms for raising the borrowing limit. The panel is instructed to set levels for annual appropriations, also known as discretionary spending, as well as recommend "reforms" in entitlement programs.

Mr. Obama rejected the idea, saying the instructions meant the committee would consider Republican spending-cut proposals without Democratic ideas for raising revenue. "I don't know why Democrats, right now, would agree to a format that takes off the table all the things they care about, and is confined to the things that the Republicans care about," the president said.

Senate Democratic leaders formally introduced legislation late Tuesday to extend the borrowing authority until after the 2014 midterm elections. The bill includes none of the policy provisions demanded by many Republicans.

Senate Majority Leader Harry Reid (D., Nev.) said that if Republicans took advantage of all the delaying tactics at their disposal, a final vote on the measure couldn't occur until Oct. 16, the day before the Treasury says it will run out of emergency measures and be left with about $30 billion in cash to pay bills, which could run out in a week or two.

There was no sign, at least for now, that Mr. Reid would win enough Republican support to amass the 60 votes needed to pass the debt-limit increase through the Senate. Even Sen. John McCain (R., Ariz.), who has been arguing against the GOP strategy of demanding health-law changes in exchange for funding the government, said he wouldn't vote for a debt-limit increase without some deficit-reduction add-ons, though he pleaded with his colleagues to come to an agreement.

"For the president and Harry Reid to want to humiliate Republicans is wrong," he said. "And for Republicans not to understand that the American people—70% of them—disapprove of us is something they ought to appreciate more."

Mr. Obama said the Treasury is exploring contingency plans for possibly prioritizing payments if the U.S. borrowing limit is exceeded.

He drew a dire picture of the consequences of failing to raise the debt ceiling, saying that "every American could see their 401(k)s and home values fall, borrowing cost for mortgages and student loans rise, and there would be a significant risk of a very deep recession."

Investors said the selling in U.S. Treasury debt was concentrated in issues that mature between Oct. 17 and a month later, underscoring the fear that the government could delay interest payments on those bills while a deal is negotiated in Washington. Yields on bills maturing after mid-November remain near zero, though some market participants said that could change if the stalemate continued.

"I don't plan to cut T-bill holdings for now," said Thomas Urano, portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $10 billion in assets, including money-market assets. "Anxiety could rise further if there is still no deal in coming days."

Republicans you may not appreciate this but the latest polls show you are losing the public and business.. It's time to get real. You cannot keep this government shut down. Business and people are hurting and getting angry ...most with the GOP and especially the very minority Tea Party. How long can you let the tail wag the dog?

Tensions....schmensios. Congress is still paying for itself...still has the gym open. However, the WWII monument must be closed...even though it is in an open mall. We are proving to ourselves that 1.) we have much more govt than we want or need, and 2.) there is absolutely no rational reason to go into debt to pay for the services that we are (mostly not) getting. It's time to shrink the beast.

Until recently Mr. Boehner deserved to be unseated. His tendency to allow Obama to bully into bad voting decisions is hardly what conservatives need. The real question is whether or not the Republican Party has any interest in Conservative values. Many believe they are as happy to ‘borrow and spend ‘ as their Democrat counterparts.

We’ll see how it goes this time. In the past, once the bluster and posturing was over, the debt limit was raised, there were NO meaningful spending cuts, the Fed continued watering-down the dollar at the rate of $85B/month, and we trotted right down the road to bankruptcy like nothing ever happened.

I have this vision or Pelosi and Boehner toasting each other a week from now, and saying, “Well! Looks like we fooled them again!” - - although it is unclear who says it to whom - - -

The Dems are acting like spoiled 4-year-olds. Perhaps they should threatento hold their breath if they don't get their was (or maybe just shut down things that could stay open: parks, ocean areas, the WWII memorial ....)

The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government's reckless fiscal policies. ... Increasing America's debt weakens us domestically and internationally. Leadership means that 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

--Barack Obama, February 2008

The problem is that the way Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children, driving up our national debt from $5 trillion dollars for the first 42 presidents -- number 43 added $4 trillion dollars by his lonesome -- so that we now have over $9 trillion dollars of debt that we are going to have to pay back. [That's] $30,000 for every man, woman and child. That's irresponsible. It's unpatriotic.

BO is a liar. Default is not inevitable. Without borrowing tax revenues cover 3/4ths of 2113 budget. Repaying all debts is EZ with this revenue flow. Think our creditors are happy with us increasing our borrowing limit? This defies the Laws of Economics. Since 2008 we increased our total debt by 70% while our economy since then grew less than 10%. This is unsustainable.

Senator Obama said 9 trillion in debt in unpatriotic so what is 17 trillion in debt? No matter what party you are in we have to stop spending more than we make at some point so our leaders need to lead that is why they are their. It is reckless not to address our debt problems, Obama is our leader so I am disappointed that he will not lead on this issue because he needs to in the worst way.

For the last few weeks both sides have been digging in on their position over the debt. The republicans want a reduction in spending , the democrats say no. Both sides say lets talk, the republicans want to talk before raising the debt limit, the democrats say raise the debt limit then we'll talk.

Obama and Reid are now saying raise the debt limit even if it's for a short period then we'll sit down and negotiate.

My question is ..... We have had and still have some time before the magic witching hour of default to settle this by negotiating NOW. What's the problem? I know Obama is trying to save face over his second red line that is quickly fading away. In the meantime our economy sinks further down with no end in sight.

To both sides. Grow up and act like the adults you want the folks to believe you are.

The Tea Party is holding our government hostage in an effort to extort ransom. And It seems to me that the Tea Party reports directly to the Koch Brothers and their plan is to destroy our country and everything we stand for in order to create some kind of Ann Randian society - where the 1% and not the people rule. If that isn't open sedition I don't know what is. The Tea Party represents a real threat to America; and many people who post here have so much hatred in their hearts for our first Black President that they are blind to exactly what is going on.

Robert,The teapots/GOP shutting down the EPA, with hundreds of billions of dollars of major projects in the system pending approvals, let alone the tens of millions of jobs now at risk in your delicate recovery phase.

Michael,Wondering does these numbers mean much to these families?Today there are some 100m+ Americans earning an average wage of $25,000 per year just above the poverty level, about same number when George w made his teary exit.

Martin, a little like this?On the eve of George w teary exit this mess left behind.“In 2008, 91.6 million people—more than 30 percent of the nation’s population—fell below 200 percent of the federal poverty level. More individuals lived in families with incomes between 100 and 200 percent of poverty line (52.5 million) than below the poverty line (39.1 million) in 2008. Between 2000 and 2008, large suburbs saw the fastest growing low-income populations across community types and the greatest uptick in the share of the population living under 200 percent of poverty.”http://www.brookings.edu/research/papers/2010/01/20-poverty-kneebone#

"The republicans want a reduction in spending , the democrats say no."

Frank, that is exactly the kind of blatant distortion of fact that makes it impossible to deal with this issue intelligently.

Fact...both Democrats and Republicans want deficit reduction. Republicans say that they will only support deficit reduction through spending cuts. Democrats say that the plan must balance spending cuts with increased revenues. And now, Republicans spent almost a year focused almost singularly on PPACA rather than seriously pursuing a balanced approach to the problem. The CBO has even published a 20-year recovery strawman that would start us on a path toward wellness but it can't be discussed for all of the screaming from the GOP.

Paula: To start with, we are already in a country where the 1% rule and they live in DC, work on Wall Street and live in Hollywood. As far as Obama is concerned, they are the only people who are important.

If you take a look at the businesses that the Koch Brothers have investments, they NEED a thriving middle class for those investments to be profitable.

If you want to talk about racism, Obama's and Holder's actions speak louder than words. They are both racist to the core.

Since when is the House "holding our government hostage"? Last I heard, Congress has the power of the purse. Very specifically, Congress has the right to fund or defund absolutely anything it wants and to attach specific provisions to such funding. If you don't like it..... take it up with the framers of the Constitution. I guess it was their bad.

Look, the hard cold truth is that a majority of US Congressmen oppose raising the debt ceiling without specific spending reductions to offset the increase; are not happy with ACHA and want to see it repealed or drastically changed AND are in completely safe Districts. They may differ on the precise approach to dealing with the issue, but none are in real jeopardy of being punished at the polls by their constituents based on tactical approach.

If this is the case (and it certainly is!), then how the Senate splits or who is in the White House becomes moot. The President and the Senate Majority Leader are eventually going to have to negotiate with Congress, whether they want to or not. Of course they do not like being pressured to negotiate. All negotiations are, by definition conducted under threat. Otherwise, why would anyone negotiate at all? So unless the President thinks there will be a massive shift in the political status quo (which just will not happen), he better resign himself to having to make some concessions to get the government re-opened and the debt ceiling raised. Railing and wailing against the GOP is non-productive. A true leader would acknowledge political reality and sit down to talk.

So then tell us Paula, exactly what is going on? You claim that the Tea Party is "holding our government hostage in an effort to extort ransom." What are the terms then? How much are they asking for? I have not heard the GOP demand a suitcase full of unmarked, non-sequential bills or a helicopter to get out of the country.

The weak default argument from the libs always boils down to racism, as you insinuate in your last sentence. However, what this all really boils down to is a government that is out of control with its spending, including a new social program that requires payment of subsidies (i.e., even more money out the door).

I agree that it's sad that, in order to draw attention to the deficit situation and to get any real progress underway, the GOP has had to resort to an extreme measure. But President Obama won a tax increase already, after which he tacked on more spending with the ACA. For him to now insist on even more revenues without any spending cuts is completely absurd.

What's not to like about balanced budgets, fiscal sanity, and . . . what Nancy Pelosi promised when she was inducted as majority leader of the house. "No more deficit spending!" Sure she can't be wrong. After all, someone who says "we have to vote on a Obama Care so that we can see what is in it," has to be in their right mind . . . Right?

Barrie: The reality of the situation in the USA is that food stamps are being abused and there are so many people on unemployment and SS disability that they do work, but in the underground economy for cash or barter to escape paying income taxes.

I see it every day, but I imagine that it is difficult for you to see from Australia.

Today there are some 100m+ Americans earning an average wage of $25,000 per year just above the poverty level, about same number when George w made his teary exit.

“During past recessions, American cities became centres of poverty and crime. But this time, it was the suburbs that suffered.Between 2000 and 2008, suburbs saw their poor populations grow by 25 per cent — almost five times faster than urban poverty growth, according to Brookings.

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